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Stocks

* Large cap stocks, emerging markets seen attractive

* Prices in Europe looking very cheap, but may be risky

* High-yield debt a new favorite asset class

By Andrea Hopkins

Aug 28 (Reuters) - The men who set investment strategy at
two of Canada's biggest life insurers both like real estate,
large-cap equities and emerging markets as they seek the best
returns for their massive wealth management portfolios, but they
disagree on the risks of Europe and high-yield sovereign debt.

With global risks and slow growth likely to keep North
American bond yields low and equity markets on a sideways pitch
for the next 12 months, strategists at Sun Life Financial Inc's
global investment arm and at Manulife Financial Corp's
asset management unit are looking elsewhere for
returns.

Both start with relatively safe plays like large-cap,
dividend-paying North American stocks for income, add real
estate for cash flow, and then sprinkle in emerging market
stocks and high-yield debt for riskier upside potential.

"What you really want to focus on are companies that have
very strong cash flow, growth potential and the possibility for
dividend growth," said Bob Boyda, co-head of global asset
allocation at Manulife Asset Management, who oversees some $218
billion of assets.

That recommendation is shared by his counterpart Sadiq
Adatia, who is chief investment officer at Sun Life Global
Investments, which has C$5.6 billion ($5.7 billion) in client
managed money.

"Today I would be putting money into income portfolios,
because there is an opportunity to get some yield. A lot of
those are large cap companies that have good balance sheets, so
if there is a downturn they are able to withstand that downturn
without losing that dividend," Adatia said in an interview.

"I think that is a great way to play what is a sideways
moving market. Valuations are also cheap as well, so there is
also an upside potential with those dividend stocks."

Dividend-paying blue chip stocks from banks to retailers to
pharmaceuticals and aerospace companies may not be sexy, but
they're a source of income in a landscape where bond yields are
stuck at historic lows and geopolitical risk lurks.

And with North American economic growth barely positive and
European growth trending negative, Adatia and Boyda both look to
emerging markets to add growth potential.

"Everyone puts a lot of emphasis on China slowing down, but
relative to other countries, China is still head and shoulders
above everybody else," said Adatia, noting that a slowdown in
Chinese gross domestic product to 6 percent is still triple
Canada's expected growth in the next year.

"People talk about emerging markets as a riskier asset
class, but is it riskier than the euro zone? And does it not
have more upside than the euro zone?"

Boyda adds that Brazil, Russia, India and some smaller
emerging economies are on his list of volatile markets that
promise growth and are "a good place to put some assets".

Adatia said emerging economies stand to benefit if North
American or global demand picks up, as well as from their own
growing middle class, whose wealth is increasing even as the
developed world is stuck in a rut.

While large-cap stocks and emerging market exposure may be
unsurprising picks by asset managers with huge portfolios, they
both also point to high-yield debt -- whether junk bonds or
emerging market corporate debt -- as a favorite asset class.

"We are very positive on corporate and even high-yield
debt," said Boyda, noting opportunities in Asian bonds.

"Developing nations are in need of capital and they are
willing to pay up for it, so we see an 18- to 24-month horizon
that offers high single-digit or low double-digit returns in
something like an Asian bond fund that has a total return
objective."

Where Boyda and Adatia disagree is on high-yield sovereign
debt. Manulife said it remains too risky, while Sun Life said
careful choices among economies that won't be allowed to default
can offer high returns for buy-and-hold investors.

"Even if they get it wrong, and were supposed to get 17
percent yield on something, they may get 12 (percent) in the
end, and that is still fine for them. What they don't want is a
default. But even if it is a small portion of a portfolio, it is
worth the risk given what else there is to invest in," Adatia
said.

They also disagree on Europe. Adatia thinks the outlook
there is still far too cloudy to start taking advantage of cheap
stocks, Boyda sees large-cap European equities looking like very
inexpensive buys for long-term investors.

"A lot of great global companies are being ruthlessly marked
down simply because of an accident of where they are domiciled,"
Boyda said.

Both strategists like real estate -- Boyda likes commercial
real estate, while Adatia also likes residential and even
high-flying REITS -- for diversity and yield.

The men are also united in their expectations for a rocky
ride globally for the next few years, as massive global risks
play out on financial markets. As always, diversified portfolios
and a long-term view are recommended.

"What is my main message? We're fully invested and scared,"
Boyda concluded with a laugh.